Expert Insight: How Indian reforms and business environment affect foreign investors

Home/Expert Insight: How Indian reforms and business environment affect foreign investors

Expert Insight: How Indian reforms and business environment affect foreign investors

Expert Insights: Eli Hamacher | Freelance business journalist

Published in November 2018

One of the biggest challenges facing the Indian business is sales. “Indian business partners prefer top quality from Germany at Indian prices,” says Jochen Landes, Managing Director at TII India Pvt. Ltd. Foreign company representatives and Shashank Verma, Head of Supply Chain and Order Management at Maier+Vidorno, report how companies master the challenges in India.

Jochen Landes travels a distance of 65 kilometres to work from Gurgaon, India, near New Delhi to the neighbouring Bawal. While it took him more than two hours per trip earlier, it now takes him just over 60 minutes. “Since PM Narendra Modi took office, the infrastructure has improved significantly. This also benefits the economy”, Landes agrees with colleagues and experts. The doctor of physics has been in charge of the India subsidiary of the German TII Group since 2013, which produces heavy goods vehicles.

Four years after the election of the business-friendly prime minister, who hopes to be re-elected in 2019, the Asian-experienced manager’s balance sheet is fundamentally positive. “The economic climate and business environment has definitely improved under Modi. Entrepreneurs are more confident than under the old government”. However, many initiatives have been launched and either not implemented at all or “implemented in a typical Indian manner”, such as the cash reform, with which the government overnight suspended the validity of all 500 and 1000 rupee notes in order to combat the shadow economy, or the major tax reform GST. “There has been progress here and there, but overall the Indian reforms have not yet brought us much progress.” But this does not change the German TII Group’s commitment to India. After several years of working for various companies in the subcontinent, Landes knows: “Business is tough and you need a lot of patience.”

India’s competitiveness significantly improved

At least, the 7th largest economy in the world has improved by 30 places in the World Bank’s Ease of Doing Business Index within one year and is now ranked 100th out of 189 countries, underlines Shashank Verma, Head of Supply Chain and Order Management at Maier+Vidorno. For example, it has become easier to set up a company in India and the tax burden has also fallen significantly, the World Bank says. Verma from M+V observes that the business environment has significantly improved and not only international corporations, but also medium-sized companies, are increasingly investing in India today. As examples, the expert cites the Korean Samsung group, which recently inaugurated the world’s largest mobile phone factory in the Delhi area, and the Swedish furniture retailer Ikea, which opened a huge branch in Hyderabad in southern India in the beginning of August 2018.

Like many entrepreneurs and managers, Landes from TII India had high hopes for the introduction of the new unified Goods and Services Tax (GST), the largest tax reform since the country’s independence in 1947. It came into force after a long back and forth on 1 July 2017 and is intended to replace a large number of different and sometimes cumulative taxes in the 29 states. The GST for trailers has been significantly reduced from a high 28% to 18%, according to the manager. “However, since the GST from services (transport of goods) cannot be offset against the GST from production, 18% of the additional costs have to be borne by the customer, which make our vehicles unnecessarily more expensive. All in all, the GST system is therefore unfortunately not the great simplification we had hoped for”. According to Verma, however, the advantage is that the GST rates now apply equally to all the federal states.

Addressing price pressure with increased localisation

One of the biggest challenges facing Indian business environment is sales and the associated price pressure. “Indian business partners prefer top quality from Germany at Indian prices”. That’s why TII India has been pursuing the “German Engineering – Make in India” strategy right from the start. “We have localised almost 100% of the production in order to be able to offer competitive prices,” emphasizes Landes, who counts the country’s largest forwarding agents among its customers. They sell them trailers adapted to the Indian market requirements, for example for the transport of wind turbine blades or bridge components. The company’s own employees take care of sales.

“Own personnel is absolutely necessary in India in order to be really successful. This is the only way to establish a relationship with Indian customers that enables high-quality sales”, Maier+Vidorno’s Managing Director, Klaus Maier is convinced. Landes advises newcomers to focus on generalists rather than specialists at the top of sales or production. “In fact, experience has shown that in India you are better off as a ‘Swiss Army Knife’ – bringing some of everything along.” As a result, you come into contact with all business questions very soon and are then not allowed to retreat into the comfort zone.

If a company wants to work with distribution partners, Shashank Verma recommends a policy of small steps. After a detailed analysis of their own market, sales could start in the country’s most important Indian economic centre for the product and then be extended to other hubs. The search for competent partners with appropriate industry expertise and local knowledge is recommended. “India is simply too big to be able to work with only one partner”. Verma advises against trading houses or partners that are represented throughout India, as the sales staff are usually poorly trained and often do not acquire the necessary expertise for a particular product.

Support from Experts pays off

Many small and medium-sized enterprises cannot, and do not want to, work in India on their own because of the sheer size and heterogeneity of the country. Though the Indian reforms are making is easier to do business in India and the overall business environment in the country is improving, expertise in the market is what will give you an edge. The subcontinent is ten times larger than Germany; in 29 federal states its inhabitants speak more than 100 languages. Leuze Electronic GmbH + Co KG from Owen in Baden-Württemberg therefore decided to initially develop the sales in the subcontinent under the Business incubation of Maier+Vidorno. From market research to registrations, imports and personnel search, the Germans made use of the services of the experienced consultants. Even after the founding of its own subsidiary in 2012, the back office activities, including accounting and IT support, were retained by M+V, with 20 years of India market expertise. Of the 32 own employees, 26 can now concentrate on sales at the Indian subsidiary Leuze Electronic Pvt. Ltd. The company imports optical sensors for electrical automation from Germany and China and supplies to customers in various industries like packaging, automotive and intralogistics.

Manish Sahay, Managing Director of Leuze India relies on a good mix of its own team and distributors for sales. “I think a ratio of 60% to 40% is ideal”. Leuze would look after the large strategically important customers itself, while the smaller customers would be dealt with by one of ten distributors spread throughout India.

One of the major challenges facing the Leuze MD is the current weakness of the local currency. The Indian rupee has lost more value in 2018 than ever before and fell to an all-time low due to rising interest rates in the USA and the current trade dispute. In order to remain competitive, Leuze India was able to negotiate certain discounts on fast moving and high volume products with its German parent company. “At the same time, we are pushing ahead with localisation”, Sahay emphasises. The strategy is paying off. While last year the major tax reform as well as the cash reform had cost significant growth, this year’s sales will increase by 30%. Sahay is convinced that 2019 will be a critical year for the economy due to the parliamentary elections. “However, if Prime Minister Modi is re-elected, the many Indian reforms he has initiated will pay off and have a positive effect on Leuze’s business as well.”

– Eli Hamacher works as a freelance business journalist. One of her main topics is India.

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